Bangladesh economy in transition

Unarguably, Bangladesh economy pivoted into transition after the regime that was in power for over a decade and a half was ousted violently, leaving little by way of continuity in economic policy making. Restructuring and re-configuring the shattered financial sector rightly received top priority of the interim government. Monetary policy instruments were prudently used to rein in inflation that obstinately hovered around double digit. Reversing the chronic practice of money laundering, attempts have been made to retrieve some of the money siphoned off to safe havens. Public sector spending, particularly under the annual development plan, has been rationalised.

An initiative has been taken recently to develop a new index aimed at providing a more realistic representation of economic activities. Currently, the Bangladesh Bureau of Statistics (BBS) measures only industrial production through the Quantum Index of Industrial Production (QIIP) which fails to capture the full range of economic activities, particularly the contributions of the services sector. According to BBS, the shift in consumption trends, particularly the growing demand for tech services, makes the QIIP inadequate as a measurement of growth of the economy. The services sector’s share in the gross domestic product (GDP) of the country was 52.72 per cent as of fiscal year 2023-24 (FY24) and it is increasing in size. The introduction of a new measurement tool (Quarterly Index of Services Production - QISP) is expected to provide a more comprehensive measurement of the growth of the economy. Alongside, measures are underway to make a realistic estimation of the GDP.

At the micro level, supply of essentials, particularly food items like rice, edible oil, pulses etc has been smoothed over through duty free imports. This has been supplemented with open market sales of essential food items through Trading Corporation of Bangladesh (TCB).The strategic goals revealed by these policies  are obvious: firstly, to rein in inflation to give relief to the average consumers; and secondly, to re-orient development programmes affecting macro-economic variables consistent with repayment capacity. The outcome of the first set of policies can be analysed within a short term framework while the second policy interventions can be judged for their effectiveness only in the medium term. With these introductory observations, an attempt is made below to visualise   the state of Bangladesh economy, both at micro and macro levels, as it prevails now.

Micro economy: For the first time in many years, the price of essential food items did not rise during the month of Ramadan. The liberal import policy for food items and weakening of the syndicates that flourished under political indulgence in the past, undoubtedly accounted for this unprecedented behaviour of the market. The role of open market sales of food items through TCB was circumscribed in the beginning because of scrutiny of the card holders which accounted for high food inflation. As a result of the pragmatic policy taken later to combine free market operation and public distribution of food (both bolstered by duty free import of food items) food inflation has now registered a decline. According to BBS, food inflation in March was 8.93 per cent, compared to 9.24 in February last. But the headline inflation has increased to 9.35 per cent in March, up from 9.32 in February because of increase in prices of non-food items. With the sharp  decline of oil and gas prices in international market, the domestic price of these crucial non-food items can be expected to register a decline, bringing  down both core and headline inflation. What is worrying now is the gap between the rate of increase in wages and the rate of inflation In March. The rate of increase in average national wages was 8.15 per cent, above the rate of inflation at 9.35 per cent. People in the low income group are hard put to make both ends meet because of this discrepancy between their income and market prices. Continuing with social safety net programmes and open market sales of food items appears to be the answer for the short term and perhaps for the medium term as well. As food items take up much of the consumption basket of the low income group and bulk of them are met by local production, growth in agriculture sector will be crucial in determining the level of inflation. The creeping rise in prices for rice, edible oils and vegetables after Eid festival  is a warning that  market for food items has an inherent tendency of being skittish due to operation of syndicates  and there cannot be any let up in the  enforcement  of regulations and countervailing measures  by the government in this respect.

An important initiative of the interim government is a plan of action to examine every stage of the supply chain of nine key commodities   so that consumers can buy essential items at fair prices from kitchen markets. The commodities are rice, edible oil, onion, egg, potato, pulse, sugar, green chilli and cauliflower. Different agencies will first inspect their supply chain from import or production stage to consumers’ end to identify the causes of price hikes and prepare a detailed report based on the findings. The Bangladesh Trade and Tariff Commission (BTTC), Directorate of National Consumer Rights Protection (DNCRP) and government intelligence agencies will then finalise the report as per the terms reference (TOR). The TORs include determination of the price of goods, identifying the causes of price spiral, spotting the participants in the supply chain (producers, importers, traders and consumers) and fixing share rates of the participants who are involved in setting prices of essential commodities. This is the first time that a systematic attempt is underway to supervise and control price through a combination of market forces and government intervention. If successful, this will be a test case of micro policy of government working through free market principle.

Macro economy: According to latest report of BBS, at the end of the second quarter of FY25 (October-December, 2024), the rate of growth of GDP was 4.48 per cent. This is a significant improvement from 1.81 per cent growth rate crawled during the first quarter (July-September) of fiscal FY25. The increase in the rate of growth indicates that the shock of the political turmoil during the last days of the ousted regime and its after effects have been overcome to a great extent. But the recovery and growth has not been uniform and varies from sector to sector. For instance, the BBS report shows that during the October-December quarter of FY25, agricultural growth rate lagged behind those in industry and services sectors. Against 7.10 per cent growth in industrial sector and 3.78 per cent in services sector, growth rate in agriculture was a paltry 1.25 per cent. The figure for the corresponding period last fiscal was 4.09 per cent   The causes for this laggard performance in agricultural sector, relative to the other sectors, have not been explained. As agriculture was not adversely affected by the political upheaval last year, which affected the services sector the most and industries sector next, the anaemic growth of agriculture calls for in-depth analysis. One explanation may be the three waves of floods last year, the worst being the one in August affecting 11 districts in the eastern part of the country. But there may be structural problems which have become chronic. Among structural problems, low prices at farm gates for farmers are known to have acted as a break on the growth in the sector. Government procurement price to ensure fair price to producers cover only rice and that too fails to benefit farmers because of delay in procurement and built-in corruption.  A robust agriculture sector is not only important for boosting GDP growth   but is also crucial for reducing dependence on import of agricultural products, especially food items. There is urgent need for bringing about structural changes, ranging from production (subsidy) to marketing (procurement, regulation of wholesale markets) and the interim government provides the ideal backdrop for carrying out necessary reforms in this sector traditionally known as ‘primary’.

Meanwhile, the interim government has revised down the economic growth projection for FY2025 to 5.2 per cent from the previous 6.75 per cent in view of the prevailing challenges in the economy. The Asian Development Bank (ADB) has significantly cut Bangladesh economic growth forecast, suggesting reforms are required to achieve higher growth. ADB has cut Bangladesh GDP projection by 1.2 per cent  to estimate GDP for fiscal 2024-2025  at 3.9  per cent in its Asian  Development Outlook (ADO) for 2025. The ADO in September 2024 forecast that Bangladesh would expand at 5.1 per cent rate during the current fiscal (FY25). Its economic growth projection in April, 2024 was much higher at 6.6 per cent. Among the causes for reduction in earlier estimate, the ADO mentions ‘slower growth in services owing to political unrest, financial sector tightening and vulnerability, persistent inflation and reduced   household purchasing power’. Though it has projected a better economic future in FY2026, estimating 5.1 per cent growth in GDP, it has also drawn a grim picture for the near future resulting from global economic slowdown sparked by sweeping tariffs slapped by America on almost all countries, including Bangladesh. ‘The US is the largest export market for Bangladesh. So, given this, the tariffs are expected to adversely impact export earnings’, the ADO has said. About inflation, the latest ADO of ADB has projected it to an average 10.2 per cent in FY25, which is higher than the latest estimate made by BBS.

Growth of the economy depends on performance of private and public sectors. Here, in addition to sunken investments, new investments play crucial roles. From available data it appears the level of investment in the private sector during FY25 has registered a decline, which is a cause for concern as the sector is a major contributor to growth and employment. One indicator of private sector growth is the level of private sector bank borrowing for investment. According to the current monetary policy, the target for private sector borrowing has been fixed at 9.80 per cent. Bangladesh Bank figures show private sector borrowing till February last was 6.82  per cent compared to 7.5 per cent in the previous month. Increase in interest rate for borrowing, liquidity crisis in banks, shortages and high cost of purchasing foreign exchange and last    but not the least, change of regime involving change of investors in private sector are among the main causes for a weakened private sector. Not only new investors have not come forward during the current fiscal because of the factors mentioned, many of the old investors and entrepreneurs who flourished under crony capitalism under the previous regime are either absent (hiding or living abroad) or have reduced operation, biding for a settled political future.

The bulk of bank borrowing by private sector is for opening letter of credit by importers. Because of foreign exchange shortages and high exchange rates, many importers have been discouraged to continue their business or have dramatically reduced it. According to Bangladesh Bank, during the first eight months of the current fiscal (July-February) L/C for capital goods declined by 30.15 per cent. During the same period, L/ C for intermediate goods decreased by 2.5 per cent.

According   to the apex business and industries body, many banks were not feeling comfortable in giving  loans to the private sector in recent months  and were more inclined to the high-yielding, risk free   government  securities.

Public sector investment has sometimes compensated for sluggish growth in private sector. But because of the financial chaos inherited by the interim government public sector investment has not marked a significant uptick. According to official  data, during  the first-half (H1) development budget spending has been uninspiring  as ministries and agencies  under them could spend only Tk 407.28 billion out of the total allocation  of Tk 2.81 trillion, implying  that up to December 2025, actual expenditure was  only 14.47 per cent of the total  development budget. Lower rate growth of the public sector is the result of downsizing of the development budget by the new government, weeding out less important projects, static availability of revenue income, higher amount  paid for  subsidies interest on previous public borrowing, non- disbursal of the third and fourth tranches of IMF’s $ 4.7 billion bailout loan.

It was expected that after the overthrow of the autocratic regime, the interim government would receive foreign loans and grants on a larger volume. But though interest was shown by lending agencies nothing much has materialised in real terms. Figures show that instead of increasing commitments and disbursements,   both declined during the first eight months of the current fiscal (July-February). Commitments for fresh loans declined by as much as 68 per cent. According   to ERD of the Finance ministry, commitments for multilateral and bilateral loans during this period  amounted to only US$2.3 billion. Alongside commitments for new loans, disbursement  also have seen a decline  of 800 million   dollar during   the same period. (The Financial Express, March 25, 2025).

Among the good news on the macro-economic side is the development in the export sector. According to Export Promotion Bureau (EPB) source, the country’s merchandise export earnings rose by 10.63 per cent to $ 37.19 billion during the first nine months  of the current fiscal based on the readymade   garment ( RMG) sector’s  strong  and consistent  growth. Export earnings were $33.63 billion during the July-March period of the last fiscal. The single-month earnings in March, 2025 stood at $4.25 billion, marking an 11.44 per cent increase, compared to the corresponding month in 2024. The country’s export earnings from RMG alone stood at $30.25 billion during the July-March period of FY25, marking a10.84 per cent year-on-year rise. The single-month RMG export earnings in March 2025 stood at $3.45 billion, 12.4 per cent higher than that in the corresponding month last year. While the contribution of RMG to export earnings continues to bear good tidings, the dependence of the economy on one item of export has been a matter of concern for policymakers. This concern has been particularly pressing in view of the ensuing cut-off period for Bangladesh’s graduation from LDC-status. The government of  Bangladesh is seized  with the challenge  and has reportedly  got  down to devising  a strategy for  keeping competitiveness  of  four major items of export beyond RMG, after 2026 when export subsidy will be discontinued   following  LDC-graduation. The four items are: leather and leather goods, jute goods, agriculture and agro- processed goods and pharmaceuticals. It is encouraging to learn that the ministry of finance has   formed a committee to devise a strategy to maintain competitive edge in the global market for these four items. But the basket of exports requires to be diversified further to include light engineering products and consumer durables, even heavy engineering sector like shipbuilding where Bangladeshi workers have shown their mettle.

The second piece of good news on the macroeconomic side is the record foreign exchange earnings through remittance sent by wage earners. According to Bangladesh Bank source, the total amount remitted from July 2024 to March 2025, the first nine months of current fiscal, stood at $21.77 billion, compared to $16.69 billion for the corresponding period last year. A new record was set in remittance earnings, reaching an all-time high of $2.74 billion in just 24 days in March. Though a major factor behind the recent surge in remittance was Eid festival, the use of banking channels has been significant for this development. The illegal money transfer through ‘hundi’, that deprived the country from foreign exchange earnings, has drastically dwindled after the change of governments, indicating linkage between hundi operators and their political patrons.

The increase in remittance, along with export earnings, has significant implications for Bangladesh economy, helping to stabilise the foreign exchange reserves and support the forex market. The foreign exchange reserves of the country, as of 24 March, was estimated at $20.01 billion as per IMF’s BPM6 (Balance of Payments and International Investment Position Manual, sixth   edition,2009).

According to Bangladesh Bank data, exchange rate of Bangladesh Taka against USD depreciated by 1.67 per cent during July- December period of FY25  while Indian Rupee  depreciated  2.19 per cent during the same period, indicating  Bangladesh’s foreign  exchange  market is more stable than that of India. There is now no selling of foreign currency from the forex reserves as was the practice during the previous government. A result of this policy the foreign exchange rate has become market based, relieving the reserves from pressure. The flexible exchange rate operating in market has resulted in a narrow difference in exchange rates between formal and informal markets, which is one reasons why remittance is being sent mostly through banking channels now.

As a result of significant growth in remittance and uptick in exports, Bangladesh is now having surplus in current account for the first time after a year and a half. In a recent interview the Bangladesh Bank governor said, ‘There was a deficiency in the balance of payment, our reserves were falling, and our currency was depreciating rapidly. But after six months of the present government, I would say that we are maintaining a virtual balance in our current account’ . The data of the central bank  shows that the current account   balance stood at $33  million in surplus  during the July- December period  of  FY25, overcoming  a deficit  of  over $3.47 billion during  the same period   a year earlier. According to recent data, the country saw 26.70 per cent growth in remittance inflow while exports grew by 11 per cent  in the first six months of the current  fiscal (FY25). On the other hand, import orders increased only by 3.5 per cent, bolstering the country’s foreign exchange reserves.

Capital account, another component of the balance of payment,  turned surplus with $217 million during the first half of FY25, up  by more than 35 per cent  from the same period last  fiscal. This has resulted in the reduction to $384 million now from a deficit of $3.45 billion a year ago.

To sum up, during the six months under the interim government, there are mixed performance on the micro economic side but very encouraging developments in terms of macroeconomic variables. Worsening of poverty situation, as recorded by a recent BIDS study, is a spill over from the past, presents a challenge to the interim government even if its tenure may be for the short term. The problem is, the government has undertaken a programme of wide-ranging reforms for which it does not have time. Prioritising the areas of reforms appears to be of the essence.

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